Empirical tests of boundary conditions for options on treasury bond futures contracts

✍ Scribed by Edward C. Blomeyer; James C. Boyd

• Publisher: John Wiley and Sons
• Year: 1988
• Tongue: English
• Weight: 725 KB
• Volume: 8
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990080206

✦ Synopsis

his study provides an ex ante and expost test of market efficiency for the T options on Treasury bond futures contracts traded on the Chicago Board of Trade. All option and future contract price changes are examined from market inception, in October 1982, through the middle of June 1983 for violations of the option lower boundary conditions. Out of 81,338 option price changes, 487 changes provided ex post arbitrage opportunities with average ex ante profits of $38 per trade for call options and $13 per trade for put options. Ex ante profit opportunities were largest in the early months of trading and had disappeared completely by May 1983.

In this paper we examine the efficiency of the option on Treasury Bond (T-Bond) futures contracts at the Chicago Board of Trade (CBOT) from October 1982 to the middle of June 1983. Lower boundary conditions on calls and puts are evaluated far evidence of arbitrage opportunities, after transactions costs, which could have been exploited by a floor trader. Both ex post and ex ante arbitrage opportunities are investigated using transactions-by-transactions data over the period of the study. The number and size of risk-adjusted ex ante violations are examined for evidence against weak form market efficiency.' 'We would like to thank the Chicago Board of Trade (CBOT) for its generous support in this research.